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Lien Priority Issues for Commercial Purchases

Thomas Weiss Lien Priority Issues Attorney Long Island

Lien Priority Issues for Commercial Purchases

After 23 years of leasing, Jessica, a small business owner, decided to purchase her next office space. She was disillusioned with her building’s owner because he’d done nothing to improve the property after 23 years. Her company was his major tenant and occupied 70% of the premise.

Jessica operated a 24-hour customer service and call center for over 200 clients. She operated three full-time shifts and various part-time schedules. Employees, many of them women, were coming and going late nights and early mornings. Jessica was concerned about security and low lighting in the building’s entrance and parking areas.

She’d given up on the building owner and decided not to renew her lease. Instead she’d purchase a commercial property to house her business.

Using a long-time family friend as her real estate agent, she began her property search. Jessica considered a SBA loan for her real estate purchase, a new communications system, and ancillary equipment such as a high powered generator. The loan would also pay for a feature-rich phone system, computers, and a much needed software upgrade.

After locating a beautiful building not far from her previous location, she called her SBA lender to inform them about the property. She also reached out to her real estate attorney who had several questions regarding the UCC filings and the position of the priority lien-holder. He was concerned what this would mean for future business financing options. Would Jessica need to start her search over?

The Importance of UCC Filings

UCC, the Uniform Commercial Code, is a financial form that lenders file with the Secretary of State to claim interest in a business’s assets. It initiates a lien against the borrower’s assets and protects the lender if the borrower defaults on the loan or files for bankruptcy.

Borrowers typically contact three or more financing institutions to obtain the most competitive mortgage rate and options. You may think you’re just exploring your options at this point, but the lender may be preparing to close the deal.

When filing an application to get rates, confirm the lender is not filing a UCC in anticipation of the loan’s closing. Check the small print on your application and make sure you are not authorizing the UCC filing with your signature. If you decide not to go with the lender, and may run into problems with a filing and end up paying to have the filing removed.

Be aware that lenders can file a lien against a specific asset or file a blanket lien, a lien against all the borrower’s assets. A blanket lien may interfere with future loans or lines of credit because the first lien holder, the lender, has filed interest in all assets including accounts receivable. As with any major contract, consult your small business attorney to ensure the contract terms are standard and reasonable and to negotiate contract details in your best interests.

What is a Lien Priority?

When you already have a business loan and need to obtain additional financing, speak first with your current lender. Consider a line of credit in addition to your mortgage loan. If you move forward with additional financing, you establish a junior lien, also referred to as a subordinate lien because it’s in second position behind the first lien holder or the priority lien.

If you pursue a loan from a second lender, the second lender can ask that the first lien holder assign a specific asset to the loan. This way, the lenders can establish which assets each has a right to should you default on the loans.

Typically the bank facilitating the loan files a priority lien. They are first in line to make a claim to your assets if you don’t fulfill the requirements of the loan. No lender wants to be at the end of the line to recover their assets, so credit may be harder to obtain and terms less favorable from secondary lenders.

Lien Positioning and Lender Problems

Down the road, in the unlikely event your business restructures through bankruptcy proceedings, liens on the business’ assets must be addressed. There may be priority lien-holders, subordinate liens, tax liens, liens on named assets, and unsecured debt. If you are restructuring but not liquidating, you’ll spend a substantial amount of time negotiating with lien holders with the assistance of your attorney and the court. Limiting the number of lien holders expedites negotiations.

Coming to a Close

While hiring real estate professionals is a must for commercial property searchers, choose someone with commercial experience. Unfortunately, Jessica’s family friend hadn’t sold commercial property before. She couldn’t help much on the financial end. Jessica’s, attorney, however picked up where she left off. He insisted she speak with her accountant before meeting with lenders to understand her financial position up front and better project future cash flow needs.

Your small business attorney advises you on:

 The details of priority lien UCC filings.

 Financing pending commercial property

 Additional funding for current and future needs Speak with your attorney before making a commercial purchase or allowing a lender to establish a lien against your assets.

What to Do Next:

Just As Every Property Is Unique, Every Property Transaction Is Unique – And Not Every Lawyer Has Experience Handling Them.

Using the legal process strategically is much more than just handling filings, it’s understanding how the transaction fits into long term plans for the assets and the businesses that hold them.

Thomas Weiss & Associates, P.C. provides a Real Estate Strategy Session before every representation to ensure every client understands how the legal process can make a big difference in their ultimate financial outcome.

If I’m not the right attorney for your transaction, you have my commitment that I’ll point you in the right direction. Just call my office at (516) 746-7452 to schedule.